2018-06-05

Trade Collapsing With Mood

According to free trade theory, the best policy for a nation is to lower its tariffs unilaterally. Lower tariffs are good for economic growth. Therefore, all nations should ignore President Trump and accept that the U.S. will harm itself with tariffs. Yet no one is screaming at other nations to not be stupid, which tells us something important about trade. At the very least, free trade is a very fragile system as currently designed. That alone screams for major reform because it cannot survive a downturn in negative mood. Demanding nations subvert their sovereignty to a fragile model is a recipe for what is unfolding before our eyes.

Outside of a few cases such as Canada, military and political allies are not always trade allies. And even in the case of Canada, NAFTA renegotiation is underway. U.S. policy is shifting in a pro-American people direction, not a pro-American Empire direction. Changes in foreign policy are also coming. Military alliances are coming under scrutiny. It is likely overseas bases will be consolidated in friendlier nations such as Poland. U.S. allies aren't happy today, but they're not going to get happier over the next decade. Or they might, since some of the governments upset at Trump will disappear over the next decade, replaced by governments that more closely resemble Poland and Hungary's. Or they'll have to deal with internal problems, such as Italy becoming a much larger headache for Germany.

Trade can't be solved solely with China because trade can migrate to other foreign nations. The big mistake is that the U.S. should be renegotiating with the entire world by ending the U.S. dollar's prominent status as reserve currency. Shifting to SDRs (not the best option, but likely to be popular with foreign governments) would take pressure off the U.S. dollar. It would solve the U.S. trade balance with many nations, and it need not cause a drop in the value of the dollar or a major depression in foreign economies during an adjustment phase because the dollar can be eased out slowly. It would generate inflation because instead of the world relying on U.S. dollar inflation, everyone could inflate against a currency basket. If the basket included gold, the world would slowly move towards a gold standard as fiat currencies inflated over the ensuing decades.

Foreign governments also aren't taking any leadership role. Some are hitting back reciprocally such as Canada mirroring U.S. tariffs. Others, however, are targeting Trump voters. But if there is now a "wartime" mentality among the public, this will backfire because people value "winning the war" above economic growth. Mexico and the EU are among the nations playing with political fire.

The Mexican tax list was targeted at US pork, apple, grape and cheese products, which were mainly from Trump’s ticket positions at the 2016 election.

Previously, the EU had submitted a list of counter-tariffs to the WTO totaling about 6.4 billion euros, and it will be implemented in two phases. The list of products includes sweet corn, cereals, cranberries, bourbon, cigars, cigarettes, t-shirts, pants, motorcycles, footwear, and other products produced in the United States.

Among them, Harley’s motorcycle is headquartered in Wisconsin, home of the Speaker of the United States House of Representatives Paul Ryan, and the main producing area of ​​Bourbon is in Kentucky, where Senate Majority Leader Mitch McConnell is located; Levi's jeans is headquartered in San Francisco. It is the constituency of Nancy Pelosi, the minority leader of the House of Representatives. Pelosi is likely to run for the House of Representatives again in the mid-term election this year, so the fight against her constituency will also cause a strong rebound from the Democratic Party.

Whether Democrats win or lose in November is unlikely to be determined by trade policy, but if establishment Democrats win by allying with foreign countries against American workers (that's how it will marketed in the future), they are setting themselves up for failure when social mood tumbles.

Trump shocked everyone thanks to grabbing the anti-immigration position. Politicians who want to displace Trump should think about how take the trade issue from him because social mood had turned and will continue turning against globalization and free trade orthodoxy. Those who stake out a free trade position in opposition to Trump are setting themselves up for defeat, either in their own parties' primaries or in a national election. There are fair traders, anti-multinational and anti-free trade forces that could emerge in the Democrat party, as well as nationalists in the Republican party alongside anti-Wall Street, anti-Federal Reserve forces led by Rand Paul.

Crafting good policy requires looking ahead to the challenges over the next couple of decades. For now, opposition is focused on being anti-Trump and returning to the pre-2017 status quo. That is not a sustainable position as Trump proved in 2016. Moving forward, the odds of a "Trump" victory will increase. More radical politicians on left and right will emerge with more radical solutions. People think Trump is the nightmare, but he is more akin to the messenger. If the voters don't get what they want, they'll find someone else to do it.